From this morning e-mail
I went full “bear” yesterday afternoon right after beige book.
I remain that way and remain convinced that Bernanke will spend more time chastising politicians and downplaying monetary policy. I have been told by some smart people that I’m wrong – so I could well be. I’ve also been told by some smart people that I’m right – so I don’t think a disappointing Ben would be a big surprise.
There are enough closet QE’rs that if I’m right risk assets will weaken. By closet QE’rs I mean those who downplay it, but are positioned for it.
I also think HY etf’s are an easy short still. I don’t think HY will do particularly bad, but it will see some weakness, and for reasons mentioned yesteryear, the ETF’s will underperform.
I am trimming shorts, and may eventually add back some favorite longs – Spain in particular and am actually thinking of nibbling at china from long side. The divergence of china vs US seems to be getting extreme but I haven’t done the work yet.
From yesterday afternoon e-mail…
Bernanke Set to Disappoint and watch out for HY ETF’s
Bernanke will likely talk about keeping options open, but nothing specific. Neither here nor there at this stage.
He will downplay the ability of monetary policy to fix things. He’s said it before but think he will be more forceful this time.
He will aggressively push back on politicians and the fiscal policy side. I think he will take this opportunity to ratchet that up a notch and that will scare the markets especially when the republicans respond negatively and neither party shows Amy actual inclination to do anything real. Probably avert fiscal cliff but only in some can kicking way.
So that’s where I’m coming out. Negative for US assets, but not a death knell.
I think the HY ETF’s aren’t a bad short. I’m not expecting a big sell-off but think too many people have become complacent with regular retail inflows. From my conversation I see that enthusiasm waning and think some fast money bears are at risk of being caught long (yes, there are a number of bears at heart that are currently long, particularly junk bonds). Nothing major but do think market has become too complacent.
I prefer etf’s because I’m not sure the move will be big enough to really offset the bid/offer and execution risk in bonds (they will jack offers the minute it looks like it is turning back if I’m right). I still think CDS has too many shorts so won’t move much in what I think is a 2% correction – not much but is 4 months of carry at this stage.